Startups react as recession fears build

After several years of what seemed like unfettered growth, central Ohio's young technology companies are finding they need to act like their more established brethren as a potential recession puts more pressure on them to control costs.

In July, health technology company Olive cut 450 jobs, and last month, Root cut 20% of its staff, or 137 jobs, in the second round of cuts this year for the young auto insurance company.

Mortgage lender Lower.com, which bought the naming rights to the new Crew Stadium, cut an unknown number of workers this summer, blaming rising interest rates, according to media reports.

Likewise, financial technology company Upstart reduced the number of workers who help process loan applications by 140. Some of those jobs were in Columbus, which the lender has designated as its second headquarters.

What companies are experiencing locally is being felt elsewhere around the country, as tech firms ranging from Facebook parent Meta to Amazon to Twitter have been cutting tens of thousands of jobs this year.

"We go through cycles. We've been fortunate. We haven't gone through this in a long time," said Max Brickman, founder and managing director of Heartland Ventures, a venture-capital firm based at Easton. "It's not time to panic."

Young companies typically lose money and need cash as they grow, sometimes having to double their head count in a matter of months and then having to double again in a year or so after that, he said. That cash becomes more costly as interest rates rise, putting more pressure on the founder to use capital more efficiently, he said.

"2021 was like an open bar," Brickman said of the money that was available to young companies. "This is more like a hangover."

"Interest rates, inflation and rising costs of everything, uncertainty, slowing economy and employee compensation for highly competitive skilled technical talent has spiked in recent years," said Matt Armstead, who has started several companies, has invested in startups and is a partner at Columbus-based Horizon Two Labs, which helps get companies off the ground. "It's a culmination of these things and market expectations of these companies — having raised so much or being valued so highly — we are simply at a point where those things have to get realigned."

Young companies, tough decisions

Founders and CEOs of these companies say making cuts is the most difficult task they've had.

"To further improve cash flow, we are prioritizing resources that support Root's go-forward strategy," Root CEO and cofounder Alex Timm said in a letter to shareholders as part of the company's release of its third-quarter financial results last month. "As a result, we have made the difficult decision to reduce our headcount by roughly 20%."

"This is the most difficult decision I've had to make as CEO," said Sean Lane, who founded Olive in 2012. "But I make it knowing this is the right strategy for us to deliver on Olive's mission. I'm inspired by what we have done and will continue to do to ensure Olive's transformative impact for many years to come."

Armstead said the cuts reflect a balancing act for fledgling companies that have to control costs to weather uncertain times ahead while scaling up on what's working.

"Our startup ecosystem is maturing; that's the reality, and it's important to recognize and appreciate what's happening," he said. "We are on par with some of the more established startup scenes like Silicon Valley, Boston (and) New York. The focus is no longer grow at all costs but rather focus on fundamentals and get better aligned towards profitability."

Jobs still plentiful amid recession concerns, but ...

Despite the cuts, there is no sign of slowing demand for workers in Ohio — for now.

Even though some tech companies in Greater Columbus are cutting jobs, the region overall has added a solid 25,500 jobs over the past year, according to state jobs data.

Statewide, there were 305,415 openings as of Oct. 13, the most recent data available, according to OhioMeansJobs.com, the state's jobs website. That's the most in data going back four years and an increase of 28,767 job postings from the reporting period in the prior month.

Regional postings have been climbing this year, too, hitting fresh highs for several metro areas in 2022 on that most recent report. There were 69,433 jobs openings for the Columbus area, 52,840 for the Cincinnati area and 100,712 for the Cleveland area.

Even as job listings continue to climb, employers indicate they struggle to find applicants for the positions they need to fill, and that includes the startup companies.

"It's still hard to find people in every space. Startups are not an exception," Brickman said.

"There's a mismatch in the labor market (between) what skills and background that employers are looking for and the skills and background of the worker that are available," Nationwide senior economist Ben Ayers said.

While demand for labor remains strong for now, he expects that to ease in 2023 as the Federal Reserve continues to raise interest rates to fight decades-high inflation, he said.

"We would expect all of the key labor market data to slow heading into 2023," he said. "The current pace of job gains and employer demand is unsustainable, especially given the sharp Fed tightening cycle and signs of slowing demand across the economy."

Nationwide is forecasting a recession next year but doesn't expect it to be as deep as the brief but powerful recession during the early days of the pandemic and the brutal Great Recession of 2007 to 2009.

"There will be some pain, but it will be short-lived," resembling what would be considered a more typical kind of recession the American economy has experienced in the past, Ayers said.

The unemployment rate likely will increase by 2 to 3 percentage points — the U.S. rate was 3.7% in November, and the Ohio rate was 4.2% in October, (Ohio's unemployment report for November is due Dec. 16) — with the rate peaking late next year or early 2024, he said.

"The consensus is that we're going to slow down. The common fear is that the Fed is going to overreact," said Mark Partridge, the C. William Swank chair in rural-urban policy at Ohio State University. "They're going to be pushing so hard, they're going to overreach."

Beyond the Federal Reserve raising rates, so much uncertainty right now could affect the economy, whether it's a change in the war in Ukraine or fuel prices that spiked earlier in the year, he said.

But any slowdown or recession doesn't figure to change the long-term track of the economy in the state's metro areas, he said.

Columbus' population and economic growth, for example, should continue to shine coming out of any slowdown compared with other metros in the state, as has been the case for the past several decades, he said.

"What we have today is what we're going to have in the future," he said.

Did valuations of startups get too high?

Before going public two years ago, various reports pegged the valuation of Root at roughly $6 billion.

But once public, the stock has tanked, reflecting a company now worth about $100 million as it tries to strengthen its financial situation.

While some of the valuations of these young companies might seem high, Bricker said, it's because they provide a savings and value to other businesses and consumers.

Armstead said a company like Root is more visible to the pressure and difficult decisions it has to make because it is public. Olive, which is still private, is making some of the same decisions, but it isn't in the public eye.

"Both companies have investors and boards, and they are pushing for controlling costs and a focus on profitability, just like the much more established tech companies Amazon or Meta," he said.

Even companies in earlier stages of development have to show signs that they are getting their finances in order if they want to get the next stage of funding, he said.

"We are in a new era here — with big dollars comes big expectations, market-making expectations," Armstead said. "These later-stage startups in Columbus and across Ohio are fortunate to have big-time strategic investors backing them, but with all of those funds, at some point — and I think that time has come — profits, returns and fundamental positive unit economics are the prudent and reasonable focus."